Foreign firms’ troubles entering China due to supermarket practices

WangShanshan

The worst of these scandals came in 2008 when it was found that industry players were adding the industrial melamine chemical to their products to make them appear to have higher levels of protein.

The deaths of six infants were blamed on tainted baby powder, and hundreds of thousands of others were made ill. The scandal was a blow that the domestic dairy industry still hasn’t recovered from.

The scandal also caused imported dairy products to be more attractive to Chinese consumers, especially mothers, who now go to great lengths to buy foreign-made baby formula, whether in stores or through the popular e-commerce website Taobao.

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Despite this, foreign companies have had a difficult time getting their products into China. They complain that unofficial importers selling on Taobao are undercutting them because they can avoid tariff duties. They also say that a practice that sees supermarkets charge high commissions to carry their products means they face high barriers to entering China.

“I have learned that it is not easy for newcomers to enter the Chinese market,” Mike Arand, the New Zealand Trade and Enterprise’s trade commissioner in Shanghai, said.

Pay to play

In the first eight months of the year, China imported 844,000 tons of dairy products, up 28.4% compared to the same period last year, statistics from a Chinese organization that tracks the import and export of foodstuffs show. The value of dairy goods imported during this period was $2.97 billion.

“Starting from this year, the growth of most of food imports has slowed down,” said Yu Lu, vice preside of the organization said. “Only the import of dairy products has seen double-digit growth.”

Yet, foreign firms have struggled to take advantage of this demand. One reason is supermarkets force dealers to pay large commissions to put their products on shelves, Yao Wenhua, senior executive of a Beijing-based trade company, said. This has forced dealers to raise retail prices to make a profit.

Fonterra Co-operative Group Ltd., one of the largest dairy companies in New Zealand, has been seeking to expand in China. But so far Fonterra has introduced just two milk powder products, one for infants and the other for the seniors.

The products have not sold well, a source at Fonterra said. The main reason is that the company’s investors, more than 10,000 dairy farmers in New Zealand, cannot accept the high commissions imposed by retailers. Part of these commissions would be passed on to consumers, but part would be borne by Fonterra.

Chen Bin, regional manager for a company selling baby formula made in the Netherlands, said his company introduced its products to China this summer, but has not had much success.

“At the moment, we have only put our product in some high-end supermarkets in Wuhan,” he said. “But we haven’t entered the important markets such as Beijing and Shanghai yet.”

The Taobao trend

Online sales are also hurting foreign companies. When Chinese mothers want to buy formula they feel is safe for their infants, they often head to Taobao, where they can choose from brands such as Karicare from New Zealand and Nutrilon from the Netherlands, among others.

Business is brisk for Taobao vendors, who can sell up to 4,000 cans of one brand’s milk powder per month.

But the online sales usually don’t involve foreign companies doing any importing. Instead, vendors hire shoppers in foreign countries to buy the baby formula at supermarkets. The products are then mailed to China, and vendors then sell them online.

The savings for a fretful mother are big. The price of a canister of German baby formula at a supermarket in China is about 200 yuan ($31.9), but on Taobao could be as cheap as 135 yuan
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Regulators in New Zealand have noticed this underground exporting. On Sept. 28, New Zealand customs officials said they would tighten export controls for dairy products.

Also, some supermarkets in Europe have restricted the numbers of cans of milk powder that are put on the shelf.

“We have also teamed up with our local supermarkets,” Arand said. “If someone buys a large quantity of baby formula, the supermarket owner will ask them what the purpose is.”

The practice has also raised safety concerns because products cannot be tracked easily to ensure their quality.

As a result, some Taobao vendors said in October they would increase prices and limit the amount of baby formula customers could buy.

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